The discussion of financial
statements in this section assumes that the statements are prepared in
accordance with generally accepted accounting principles. Here is a brief
statement of some of the more important of these principles:

A business should have financial reports prepared at the end of each
calendar or fiscal year, with interim reports during the year. Use of
the "natural" business year as the formal accounting period has been
increasing. The natural year is the 12-month period ending at the lowest
point of business activity for the period.

Since many business transactions will be incomplete at the end of
any accounting period, some estimates will be necessary. Such estimates
are an acceptable part of financial reports as long as they are made
according to procedures that have proved reliable in the past.

Each business is considered a separate accounting unit, with the
affairs of the business kept entirely separate from the ownerג€™s personal
affairs. All records and reports should be prepared on this basis.

Financial statements are prepared on the assumption that the
business unit will continue to function in its usual manner.

For some accounting objectives, two or more methods are possible.
For example, there are several methods of computing depreciation and
also of valuing inventory. They are all valid, but once a method has
been selected for use in the records of a business, it should be used
consistently.

Accounting must be practical. Strict adherence to a principle is not
required when the increase in accuracy is too small to justify the
increased cost of compliance. A uniform policy should be adopted to
guide such exceptions, however.

All assets and services required by a business should be recorded on
the date they are acquired at their cost to the business. This cost
includes costs incurred to procure the asset or service and to place it
in position or condition for business use. Donated assets are recorded
at their cash equivalent value as of the date of donation.

A major objective of accounting is to determine income by matching
costs against revenue. The net income of a business is the increase in
that company's net assets brought about through profitable exchanges of
product and services or through sale of assets other than stock in
trade.

What Is Being Sold

In the usual buy-sell transaction relating to a "going concern," what
is being bought or sold is primarily a future stream of income. Not the
assets or property of the business, but the income these assets will
generate in the future. But future income is impossible to compute and
hard to estimate. Therefore, the buyer and seller often ignore this
unknown quantity. In trying to set the price, they concern themselves with
known values relating principally to the replacement cost of the tangible
assets being sold. This is a mistake.

Use of Past Financial Data in Valuing Future Income

It has been said that history repeats itself, but this is not always
true of the financial history of a business. First of all, the question
arises, "Why is the present owner willing to sell the business?" One
reason may be that he foresees adverse change of one sort or another.

Keep in mind, too, in trying to predict the future from present
results, that there will be a change of ownership. Will the new owner be
able to produce the results the former owner did? Is he trained and
experienced in management as well as in the mechanical or technical
needed?

There are many reasons why past operating results may not be a good
indication of future income. Still, they are at least concrete facts. They
should be examined carefully for whatever insight they may provide into
the future.

What Data to Expect

Most businesses will have at least two basic financial statements
prepared at the end of the annual accounting period - a statement of
income and a balance sheet. There may also be other statements containing
important information. These might include a reconciliation of retained
earnings in the business, a statement of source and application of funds,
and listings of such items as inventories, accounts receivable, and
accounts payable. However, the statement of income and the balance sheet
are the basic financial statements. Any business can reasonably be
expected to have these two available.

If they have not been prepared, it may be necessary to construct
approximate statements -particularly statements of income based on the
best information available. If they are available but were not prepared in
accordance with generally accepted accounting principles, they will
probably have to be adjusted.

It is essential to understand what the accountant means by the amounts
shown on the financial statements. The items discussed below should appear
on most such statements. The listing is not all-inclusive, but most major
items are discussed.

The Balance Sheet

A balance sheet lists in one section all the assets of the business as
of the last day as of the accounting period and in another section all
claims against these assets. Claims against assets include creditors'
claims, or liabilities, and owner's claims, or investment (also called
equity or net worth).

Assets

Cash. This asset includes cash balances in the bank, cash on hand
(including change and petty-cash funds), funds held in trust, sinking
funds, and funds in time deposits. Not all the cash will necessarily be
available for payment of liabilities. Change funds, for example, must be
retained in order to have the change necessary for doing business.

Marketable securities. Included in this classification are such
items as Treasury bills and perhaps stocks and bonds. These assets are
most commonly shown on the balance sheet at their cost to the business or
at their market value.

Accounts receivable. An entry that is identified merely as
"accounts receivable" or has the designation "trade" after it refers to
accounts receivable from customers only. Notes or accounts receivable from
officers, employees, or owners of the business are considered non-trade
receivables and should be entered as a separate item.

Allowance for bad debts. This is an account that is deducted from
the accounts-receivable account to give a more accurate valuation to
accounts receivable. Suppose the business has accounts receivable of
$100,000 and experience indicates that 5 percent of this amount will

be un-collectible. There is no way of knowing which specific accounts
will not be collected, but it can be estimated that $5,000 will eventually
be un-collectible. To reflect this fact on the balance sheet, accounts
receivable are shown at $100,000. An allowance for bad debts of $5,000 is
also entered and deducted from the accounts receivable, leaving a net of
$95,000 as the estimated collectible accounts receivable.

Notes receivable. This account includes the face amount of all
notes that have been given the company and that are still un-matured, even
those that have been discounted at the bank.

Notes receivable discounted. This is a contingent (possible)
liability account. If a note receivable has been discounted at the bank,
the company has had to guaranty its payment. Thus, until the maker of the
note pays the bank, the company has a possible note payable.

The amount of the notes receivable discounted is entered on the balance
sheet under the notes receivable entry and subtracted from the notes
receivable total. An alternative method is not to include it in the notes
receivable total but to show it in a footnote.

Notes and accounts receivable from officers, employees, and owners.
This amount will include amounts due the business from persons connected
with the business in some way. Advances for employee uniforms or cash
loans may have been made, for instance.

Inventories. Inventories are the major asset in some kinds of
businesses, particularly those in the merchandising field. Methods of
valuing inventories are similar in manufacturing and non-manufacturing
companies, but the mechanics of computing the values differ. Therefore,
valuation methods are discussed separately.

Purchased inventories. If the business buys merchandise or raw
materials which it merely holds for a time and then sells with little or
no alteration, the inventory is valued either at cost or at the
replacement price if the latter is below cost. If the replacement price is
higher than cost, the inventory should be valued at cost.

It is generally agreed that if the cost of transportation of the goods
to the company is a significant item, the inventory account should include
this cost. In fact, all costs involved in preparing the goods for sale
could justifiably be included. Such costs might include, for example,
certain costs of dividing and repackaging.

Once it has been decided what costs are to be included in the inventory
account, there are at least four major methods of valuing the inventory:

1. If a business specifically identifies items in costing inventory, it
must be able to tell what was paid for each item. This method is practical
for items with a high unit price, such as new automobiles or major
appliances. As the unit price falls, however, and the number of items in
the inventory increases, this method of valuation becomes less practical.

2. First in, first out, or FIFO, is another method of costing
inventory. It assumes that the first units purchased are the first units
sold, that those still in inventory are the last ones purchased. Thus, the
inventory is valued at the cost price of the last items purchased by the
business.

3. Last in, first out, or LIFO, assumes the opposite - that the last
goods purchased are the first ones sold. The inventory is thus valued at
the cost of the first inventory items to be available for selling. The
inventory valuation under LIFO does not necessarily correspond very
closely to current replacement costs.

4. The average cost method is merely an average of FIFO and LIFO. It
aims to find a middle ground between the two extremes.

If prices of the goods purchased have been rising, the FIFO valuation
will come closest to current market prices - the use of LIFO will tend to
value the inventory at less than current market prices. The choice of
inventory valuation will affect the reported cost of goods sold on the
income statement and also the reported net income.

Manufactured inventories. If the company manufactures goods from
purchased raw materials, the inventory costing or valuation method is
somewhat different. Any raw materials on hand are valued by one of the
methods described for purchased inventories. Valuation of work in process
and finished goods inventories involves three elements:

1. Cost of the raw materials used. This can be computed very exactly.

2. Cost of the direct labor used in converting the raw material into
its present state of completion. This, too, normally lends itself to
fairly exact measurement.

3. Factory overhead, or indirect cost. These are the costs of such
items as insurance, indirect materials, indirect labor, taxes, and so on.
They must be allocated to the units produced on some reasonable basis.

Total indirect costs do not vary with the amount of goods produced, or
at least not proportionately. This means that if the plant is not operated
at its maximum capacity, the indirect costs per unit of production will be
more than would be the case if the plant were operated at a higher level
of production. Therefore, idle time or idle capacity in a plant may cause
the inventory value of manufactured goods to be unrealistically high.

Prepaid and deferred items. Prepaid expenses are prepayments for
goods or services that will be consumed in the near future prepaid rent,
prepaid insurance premiums, office supplies, and so on. Deferred charges
are prepayments that will benefit the company over a period of years, such
as the cost of moving to a new location.

Property, plant, and equipment. This classification includes all
the fixed assets of the business-land, buildings, equipment, and other
tangible items that will last more than a year and will be used in the
normal operation of the business. These items, under generally accepted
accounting principles, should be recorded at their original cost to the
business.

Occasionally, a buyer may find that the seller has raised the valuation
of these assets by appraisal write-ups. If this has accrued, the buyer
must satisfy himself that the value of the assets has in fact increased by
the amount of the appraisal write-up.

Accumulated depreciation and depletion. This account shows the
amount of depreciation, or loss of usefulness, that has been charged
against the property, plant, and equipment while they have been held by
the business. On the balance sheet, the amount in each depreciation
account is deducted from the corresponding property, plant or equipment
total. This leaves the net book value, or un-recovered original cost. A
depreciation account is merely a technique for distributing the cost of a
fixed asset over its estimated useful life. It is quite possible for
assets that are fully depreciated on the books to be still serviceable,
and for assets not fully depreciated to be no longer serviceable.

There are a number of methods of figuring depreciation. Four of the
most common are the straight-line method, the declining-balance method,
the sum-of-the-years-digits method, and the units-of-production method.

The first three methods record depreciation on the basis of time. The
straight-line method records the depreciation uniformly over the years of
the asset's estimated service life. It is by far the most commonly used
because of its simplicity. The declining-balance and sum-of-the
years-digits methods record larger amounts of depreciation in the early
years. With these two methods, increased maintenance expenses in later
years are offset somewhat by the reduced charges for depreciation. Also,
there are some income-tax advantages.

The units-of-production method is based on the estimated productive
capacity of the asset rather than time. It is useful where the amount of
usage varies considerably from time to time.

All four methods will record the same total depreciation over the life
of the asset. There may be a substantial difference in the amount recorded
in any one year, however.

Intangibles. This classification includes such items as patents,
trademarks, and goodwill. The value recorded is their cost to the
business. The amount entered for a patent, for example, will be either the
cost of purchasing the patent right or the cost of developing the patent.
Goodwill will not appear on the balance sheet unless the business
purchased the goodwill and has decided to leave it on the books.

Liabilities and Owner's Equity

Accounts payable to trade.

Accounts payable to trade. The amounts recorded in this account are the
amounts owed to regular trade creditors (except notes payable) for
merchandise and other items needed in operating the business.

Notes payable. This item includes all amounts owed by the business
for which a formal note payable has been given if the note is due in 12
months or less from the balance-sheet date.

Accrued taxes payable. This account will show the amounts owed to
various taxing authorities. It will include taxes that have been collected
or withheld but not yet forwarded to the authorities. The account may also
include accruals for items such as property taxes, franchise taxes, and
use taxes the business owes but has not yet been paid. The amount shown on
the balance sheet should be the amount that the business is legally liable
for.

Wages and salaries payable. This account will show all wages and
salaries of employees earned but not paid as of the balance-sheet date.
Any unclaimed wages due former employees will also be included in this
account.

There are some rather rigid legal requirements about the handling of
taxes collected from the employees as opposed to ordinary business
liabilities.

Income taxes payable. This account may not appear on the balance
sheet if the business is operated as a single proprietorship or
partnership. It should be shown for a corporation. The amount may be only
an estimate but will usually be quite accurate.

Unearned income. Some types of businesses receive fairly large
amounts of prepaid or unearned income. The publisher of a newspaper or
periodical, for instance, is paid for subscriptions before the
publications are delivered. If a business rents property to others, the
rent will be received in advance. The amount of such income that has been
received but not earned at the balance-sheet date is recorded here. There
may or may not be a legal requirement that the unearned amounts be
returned if the company fails to deliver the services or products.

Long-term liabilities. For a liability to be considered long term,
its maturity date should be more than 12 months from the balance-sheet
date. If unearned income is prepayment for services covering more than a
year from the balance-sheet date, a proportionate amount of it should be
included here instead of under unearned income.

Owner's equity. Two elements enter into owner's equity: the initial
investment of the owner or owners, and retained profit or loss. The
computation of owner's equity is based on the recorded value of the assets
and liabilities of the business - it is merely the difference between the
total assets and the total liabilities. If the assets are recorded at less
than their true value, the owner's equity will be understated. If the
assets are recorded at an inflated value, the owner's equity will be
overstated.

If the business is a corporation, the original investments of the
owners will be kept in separate contributed capital accounts. The net
results of operations will be summarized in one or more retained earnings
accounts. All these accounts together make up the owners' investment in
the business.

If the business is a single proprietorship or a partnership, each owner
will have a capital account that summarizes his investments, his share of
net income or losses, and withdrawals he has made.

Income Statement

The income statement is a summary of the income and expenses of the
business for the period covered. It shows the net result of operations -
profit or loss - for the period.

Revenue. All income of the business from whatever source should be
included. However, income from operations is usually shown separately from
other income such as interest or rent. Charge sales are included in sales
income at the time the sale is made, regardless of when the cash is
received in payment.

Cost of goods sold. The cost of goods sold equals the cost of goods
purchased during the accounting period (including transportation) plus the
beginning inventory and minus the ending inventory.

Gross margin. This is the difference between income from operations
and cost of goods sold. The gross margin must cover operating expenses,
taxes, and profit.

Operating expenses. Types of operating expenses vary with the type
of business, but all businesses have some - building expenses, utilities,
wages, supplies, some kinds of taxes, insurance, and so on. These expenses
for the accounting period are subtracted from the gross margin to give the
net income (before income taxes).

Auditing of Financial Statements

If the buyer in a buy-sell transaction asks an accountant to audit the
financial statements of the seller, the accountant will want to make a
"purchase investigation." A purchase investigation is a normal audit with
intensified examination of certain items critical in a buy-sell situation.
The accountant may go to greater lengths, for example, to make sure that
the physical plant and all equipment are present and in serviceable
condition.

What If There are No Financial Statements

The buyer may find, in a very small business, that the owner has never
prepared financial statements. Furthermore, there may be no records
available from which to prepare them.

There is no realistic way to determine the results of past operations
without financial statements. However, there are a few records that even
the smallest, most poorly run business must have. The buyer should try to
construct from these records as realistic as possible an income statement
and balance sheet. Here are some of these records:

The seller will have had to file Federal income-tax returns that
include an income statement for the business. At least part of this income
statement will probably have been prepared on a cash basis and will not
reflect the results of operations as accurately as a statement prepared on
an accrual basis would. However, it is a fairly safe bet that the seller
has not overstated the receipts from the business on his income-tax
return. He may have tended to overstate expenses, though, particularly by
including some personal expenses as expenses of the business.

If the seller has a retail store and make sales in a State that has a
sales tax, he has had to file sales-tax returns. The buyer should examine
these returns to determine the amount of gross sales during the period
covered.

If the business has employees, the seller will have made deductions
from the employees' pay for income taxes and Social Security. The returns
prepared for the Director of Internal Revenue covering these deductions
will show the wages paid.

Almost any business will have certain types of expenses such as
property taxes and insurance. The buyer can call the County Treasurer and
the insurance agent to learn the amounts of these expenses.

A fairly good evaluation of the financial position of the business can
be made by talking to the seller's principal suppliers and to his bank to
determine the amounts owed by the seller and the credit standing of the
business.

Food For ThoughtAre you constantly
frustrated?
Good!

Tony Robbins tells us that all successful people know "success is
buried on the other side of frustration". The only people who are not
ever frustrated are those who never attempt anything.

If you're taking action and working toward achievement of your goals,
you will become frustrated on a routine basis. People don't follow
through on their word, machines break down, projects take longer than
you estimated, accidents happen. There are thousands of things that
can go wrong.

But that doesn't need to stop you. The best way to deal with
frustration is to adjust your attitude. Accept the fact that you'll
have setbacks, and look for what you can learn from them. Beating
yourself up, because of something over which you have no control, is
certainly not productive. Instead, ask yourself, "What can I learn
from this?" "How can I make sure this doesn't happen again?"

And you can take the concept one step further. If something is
frustrating you, there's a good chance that it's a problem for other
people as well. Perhaps if you developed a good solution, it would be
valuable to a lot of people. Who knows, you might could even make some
money from it. Look at your frustrations as opportunities for
improvement.

You're in control of the most powerful computer that has ever been
devised. It's located between your ears and you carry it around with
you everywhere you go. It does not control you; you control it. It
will do whatever you program it to do.

How do you program it? With your beliefs. Whatever you believe in,
your mind will blindly pursue until it is a reality. If you believe in
lack and limitation, that will be your reality. If you believe in
unlimited abundance, then that will soon be your reality.

It's all up to you and the way you think on a daily basis.
Time is the most precious and limited thing you have. It is something
that everyone has in an equal amount each day. The difference between
a life of fulfillment and abundance, and a life of mediocrity, is
determined by how you spend your time. It is as simple as that.
Treat every moment as the precious gift that it is. Use your time to
build and create and accomplish. Don't waste your time with envy,
sloth, anger and regret. In everything you do, ask yourself: is it
worth spending an irreplaceable part of my life on this?

Time can work for you if you learn to use it wisely. Consistent and
focused effort, over time, will bring desired results. Remember that
each moment is an opportunity that must be taken now.